Ask the Institute

DATE: March 11, 2013QUESTION:Can you explain the role of a market maker?

ANSWER:A market maker is a trader on an Exchange who is responsible for maintaining continuous bids and offers in his/her assigned products and provides liquidity to the marketplace. Market makers post bids and offers at prices they are willing to make trades and they take the other side of customer orders—that is, when a customer wants to sell an option the market maker buys and vice-versa. At CBOE, market makers can post their bids and offers in one of two ways: either through open outcry in the pit on the trading floor where their assigned options trade, or electronically- by streaming their quotes into the Exchange’s trade engine. The prices you see on your screen may reflect a customer’s order or it likely reflects a Market maker’s bid and/or offer price. To learn more about the role of a market maker, view this week's segment of "Ask the Institute."